The Dollar's Sliding Share in Global Currency Reserves is a Red Herring -- Heard on the Street
By Mike Bird
The dollar's share in global foreign-exchange reserves slipped
to its lowest level since the mid-1990s last year, giving fresh
fuel to arguments that the greenback's role as the top global
currency is under threat.
But reserve figures paint an incomplete picture of the
currency's heft. A broader view of demand for dollars shows there
is still no meaningful challenge to their role.
The quarterly International Monetary Fund data show the dollar's
share of reserves below 60% for the first time since 1995. At
21.2%, the euro's share is at its highest level in six years, and
at 6%, the Japanese yen is at its highest in two decades.
One of the reasons is a simple mechanical one. The dollar
depreciated last year, meaning that the dollar value of nondollar
assets in a mixed-currency portfolio rose. In the IMF data, that is
often the largest factor in each given quarter, rather than active
buying and selling.
But the second effect of a falling dollar, which is less
immediate, should act as a counterweight. As the greenback falls in
value, especially against the currencies of exporters with large
currency reserves, it encourages them to buy Treasurys and other
U.S. assets to keep their own currencies from rising too quickly
and damaging competitiveness.
If the euro does rise to take up a significantly higher share of
global reserves--back toward levels before the financial
crisis--that would actually be a positive thing for the world. Some
foreign buyers soured on the euro when it wasn't clear that the
bloc was willing to treat government bonds as safe assets during
the euro crisis. If that era is passing, it would give reserve
managers a way to achieve the currency diversification they have
long been looking for.
There are a few other factors contributing to perceptions of the
dollar's decline that bear mentioning. Some of the increase in the
yen's share represents synthetic dollar accumulation by central
banks through currency swaps. And the private sector is a larger
holder of dollars than in the past. The share of foreign-owned
Treasury and agency bonds held directly by government entities,
which includes foreign-exchange reserves, was at its lowest level
this century at the end of 2020, just south of 60%, from as high as
73% in 2009. But the private share, unaccounted for in FX reserve
data, has grown.
Reserves thus present an incomplete, 20th-century picture of
international demand for currencies. It is worth casting back to
last year to remember which currency investors scrambled for in the
worst moment of market panic in the Spring of 2020 and which
central bank had to roll out an extensive, market-calming program
of swap arrangements.
Even if the greenback's official share falls further, its
position at the distant top of the global currency hierarchy looks
quite secure for now.
Write to Mike Bird at Mike.Bird@wsj.com
(END) Dow Jones Newswires
April 15, 2021 04:57 ET (08:57 GMT)
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